Thank You

Error.

IN THE EMERGENCY ROOM, JOB NO. 1 FOR THE crash team is to stabilize the fading patient. Stop the hemorrhage. Treat the shock. Don't worry now about the binge drinking that caused the near-fatal collision in the first place.

This approach seems to have escaped President Barack Obama in his effort to save a fast-fading economy. Rather than applying a tourniquet and injecting the patient with a stimulative dose of adrenaline, he endorses the use of a drip-bag filled with a cocktail aimed at curing all the economy's ills. The mix includes appetite suppressants to reduce our craving for petroleum products, prescriptions to improve rural Internet connectivity, and elixirs to influence our appliance choices, to name but a few. These are elements of the House bill passed Wednesday and forwarded to the Senate for quick action this week. If the Senate fails to remix the meds in a way that amplifies the stimulus, the patient could slip into a coma.

Economist L. Douglas Lee, who runs Economics from Washington, a private consulting firm, says the amount of stimulus in the House bill that would be pumped into the economy is in the range 1% to 1.5% of GDP over two years -- far too little to have the desired effect. Lee, who calls himself nonpartisan, argues a stimulus closer to 3% of GDP is needed, with the immediate focus of exciting consumer demand. "[Obama] first has to get consumers spending, because companies won't invest or hire when the market for their products is shrinking," he says.

The fastest, most effective way of boosting demand would be through tax cuts, Lee adds. The Obama team should aim for between $450 billion and $500 billion in cuts, up from approximately $280 billion. Make some cuts permanent, he suggests, as a rebate check isn't nearly as effective in restoring confidence as a fatter weekly paycheck.

Barron's Jim McTague says that even with the $819 billion stimulus package that was just passed, we are still in for a very rough ride in this economy, as the banking system still needs to be saved. Is an aggregator bank the solution?

Obama also should encourage the Senate to rethink some of the tax cuts in the House bill, because they are not stimulative. For instance, tax breaks to encourage investment aren't likely to work because they are aimed at companies experiencing falling sales. Investing in a new widget machine when the current one is nearly idle makes no sense.

Lee hung out his shingle in 1999, after a stint as chief U.S. economist for HSBC Securities. Earlier in his career he served on the staff of the Joint Economic Committee, laboring mostly for Democratic masters.

Lee isn't opposed to public-works projects, though spending on them won't kick in until 2010. "If you want to stimulate the economy quickly, you can't rely on the federal government," he says. "The government isn't capable of spending quickly. The only practical option is tax cuts."

Increasing the supply of credit might help pump up spending, too. University of Texas Professor Robert Auerbach, an economist who studied under the late Milton Friedman, thinks he has the makings of a malpractice suit against Federal Reserve Chairman Ben Bernanke, as the Fed is holding a record number of reserves: $901 billion in January as opposed to $44 billion in September, when the Fed began paying interest on money commercial banks parked at the central bank. The banks prefer the sure rate of return they get by sitting in cash, not making loans. Fed, stop paying, he says.